AN ANALYSIS OF THE TAX CUTS AND JOBS ACT

January 2018

 

AN ANALYSIS OF THE TAX CUTS AND JOBS ACT

On December 22, 2017, after much, well-publicized legislative skirmishes, President Donald Trump signed into law H.R. 1, otherwise known as the “Tax Cuts and Jobs Act.”   Provisions affecting individuals are generally effective beginning December 31, 2017 and expire on December 31, 2025.  Most business-related provisions are permanent and are effective beginning December 31, 2017.

This new law is, by all accounts, the most significant revisions to the U.S. tax code since 1986, affecting almost all individual and business taxpayers.   Our firm’s general assessment of the new law will therefore be a two-part series: this first part covers changes to individual taxpayers, and the second part will cover changes to business taxpayers.

Tax Brackets

The new law changes tax brackets for individuals taxpayers.  The number of brackets remains the same; however the income levels changes, as indicated below:

 

  SINGLE TAXPAYERS  
If Taxable Income is Between:   Old Rate New Rate
0 9,525 10.0% 10.0%
9,526 38,700 15.0% 12.0%
38,701 82,500 25.0% 22.0%
82,501 93,700 25.0% 24.0%
93,701 157,500 28.0% 24.0%
157,501 195,450 28.0% 32.0%
195,451 200,000 33.0% 32.0%
200,001 424,950 33.0% 35.0%
424,951 426,700 35.0% 35.0%
426,701 500,000 39.6% 35.0%
500,001 ­ 39.6% 37.0%

 

 

  MARRIED FILING JOINT TAXPAYERS  
If Taxable Income is Between:   Old Rate New Rate
0 19,050 10.0% 10.0%
19,051 77,400 15.0% 12.0%
77,401 156,150 25.0% 22.0%
156,151 165,000 28.0% 22.0%
165,001 237,950 28.0% 24.0%
237,951 315,000 33.0% 24.0%
315,001 400,000 33.0% 32.0%
400,001 424,950 33.0% 35.0%
424,951 480,050 35.0% 35.0%
480,051 600,000 39.6% 35.0%
500,001 ­ 39.6% 37.0%

 

  HEAD OF HOUSEHOLD TAXPAYERS  
If Taxable Income is Between:   Old Rate New Rate
0 13,600 10.0% 10.0%
13,601 51,800 15.0% 12.0%
51,801 82,500 25.0% 22.0%
82,501 133,850 25.0% 24.0%
133,851 157,500 28.0% 24.0%
157,501 200,000 28.0% 32.0%
200,001 216,700 28.0% 35.0%
216,701 424,950 33.0% 35.0%
424,951 453,350 35.0% 35.0%
453,351 500,000 39.6% 35.0%
500,001 ­ 39.6% 37.0%

 

  MARRIED FILING SEPARATELY TAXPAYERS  
If Taxable Income is Between:   Old Rate New Rate
0 9,525 10.0% 10.0%
9,526 38,700 15.0% 12.0%
38,701 78,075 25.0% 22.0%
78,076 82,500 28.0% 22.0%
82,501 118,975 28.0% 24.0%
118,976 157,500 33.0% 24.0%
157,501 200,000 33.0% 32.0%
200,001 212,475 33.0% 35.0%
212,476 240,025 35.0% 35.0%
240,026 300,000 39.6% 35.0%
300,001 ­ 39.6% 37.0%

 

 

Personal Exemptions

Under previous law, each taxpayer was entitled to a personal exemption of $4,050.  The new law eliminates this personal exemption.  Unless otherwise extended, the personal exemption returns after 2025.

 

Standard Deductions

The new law increases the standard deduction for every taxpayer – $24,000 for married filing jointly taxpayers; $18,000 for head of household filers; and $12,000 for all other filers.  Also, the standard deductions will be indexed for inflation for taxable years beginning after 2018.

 

Home Mortgage Interest Deductions

Prior to the new law, individuals can deduct interests paid on their home mortgage paid on up to home mortgages of $1,000,000 (for married filing jointly), plus interest paid on up to $100,000 of home equity Lines of credit.  With the new law, mortgage interest deduction is limited to the amount paid on home mortgages of up to $750,000 ($375,000 in the case of married taxpayers filing separately) for indebtedness incurred after 2017.

Additionally, interests paid on home equity lines of credit are no longer deductible under the new law.

 

State And Local (SALT) Deductions

Prior to the new law, individual taxpayers were allowed deductions for payments made in respect of state and local tax (SALT), including property taxes, sales taxes and personal property and registration taxes.  With the new tax, itemized deductions for SALT are limited to an aggregate of $10,000.  Undoubtedly, this particular aspect of the new law disproportionately affects taxpayers from high-tax states such as New York, New Jersey, California and Connecticut.

 

Child Tax Credit

The new tax law increases child tax credit from $1,000 to $2,000 (with the first $1,400 credit fully refundable) per qualifying child, and provides for a $500 nonrefundable credit for qualifying dependents other than qualifying children.   The cutoff for the tax credit is also increased to $400,000, from $110,000.

 

529 Savings Plans

Under the new law, parents are allowed to also use their 529 savings plans for tuition at private or religious K-12 schools.

 

Deduction for Alimony Payments

Under previous law, alimony payments were deductible to payers and reportable as income to receivers.  Under the new tax law, agreements made prior to December 31, 2108 will retain the treatment of the old law.  However, agreements made or modified after December 31, 2108 may not be deducted from income, and recipients will not have to show such payments as income.

 

Affordable Care Act Individual Mandate

Prior to the new law, individuals who fail to obtain health care coverage were subject to a penalty.  The new law repeals the mandate.

 

Medical Expenses Deduction

Under the new law, taxpayers can deduct their medical expenses that exceed 7.5% of their AGI (adjusted gross income) in 2017 and 2018.  The new deduction level ends January 1, 2019.

 

Alternative Minimum Tax (AMT)

The new law preserves the individual AMT but increases both the exemption amount and the exemption amount phase-out thresholds.  For the 2017 tax year, the AMT exemption amount for single filers is $54,300 and begins to phase out at $120,700, and for joint filers, it is $84,500 and begins to phase out at $160,900.

 

Under the new law,  the AMT exemption amounts will increase to $70,300 for single filers and $109,400 for joint filers and will phase out for those taxpayers at $500,000 and $1 million, respectively.

 

Limitation on Charitable Contributions

The new law increases the limitation on charitable contributions from 50% to 60% of adjusted gross income (AGI).

 

Limitation on Allowable Itemized Deductions for High-Income Taxpayers

The new law repeals the overall limitation on high-income taxpayers for allowable itemized deductions.

 

Miscellaneous Itemized Deductions

The new law repeals deductions for expenses that previously were subject to the “miscellaneous itemized deduction” 2% floor.  These expenses include expenses for production or collection of income; unreimbursed employee expenses (including travel and car expenses); job travel, union and professional dues, uniform costs, and job search costs.

 

Capital Gains Tax Rate

The new tax law makes no changes to the capital gains rate.

 

Estate Tax

Under the new law, the top rate of 40% will apply only to estates larger than $11.2 million ($22.4 million for couples).  The top rate previously applied to estates larger than $5.49 million.

 

Pass-Through Business Taxes

Businesses organized as sole proprietorships, LLCs and partnerships do not pay corporate tax rates. Instead, the owners pay individual income taxes on their share of business income – they’re called pass-through business taxes. Those tax rates are the same as the individual income tax rates.

 

Under the new law, business owners can take a 20 percent deduction on their pass-through business income, with limits for those earning above $157,500 (single) and $315,000 (married, filing jointly).

Clearly, the changes to the tax code are fairly comprehensive and affect individual and business taxpayers differently, depending on their particular tax situations.  The changes present excellent, almost mandatory, tax planning opportunities for prudent taxpayers.  We strongly urge each taxpayer to consult with their tax professionals for empirical assessment of their particular tax situation and to undertake appropriate tax planning.

If you have any questions about your taxes, feel free to call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com .  For a FREE consultation, call us at 212-490-0704.

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